More companies now are turning toward business model innovation as an alternative or complement to product or process innovation. A company’s business model is ” a system of interconnected and interdependent activities that determines the way the company “does business” with its customers, partners and vendors. In other words, a business model is a bundle of specific activities — an activity system — conducted to satisfy the perceived needs of the market, along with the specification of which parties (a company or its partners) conduct which activities, and how these activities are linked to each other.
Business model innovation matters to managers, entrepreneurs and academic researchers for several reasons:
First, it represents an often underutilized source of future value.
Second, competitors might find it more difficult to imitate or replicate an entire novel activity system than a single novel product or process. Since it is often relatively easier to undermine and erode the returns of product or process innovation, innovation at the level of the business model can sometimes translate into a sustainable performance advantage.
Third, because business model innovation can be such a potentially powerful competitive tool, managers must be attuned to the possibility of competitors’ efforts in this area.6 Competitive threats often come from outside their traditional industry boundaries.
Business model innovation can occur in a number of ways:
1. By adding novel activities, for example, through forward or backward integration; we refer to this form of business model innovation as new activity system “content.”
2. By linking activities in novel ways; we refer to this form of business model innovation as new activity system “structure.”
3. By changing one or more parties that perform any of the activities; we refer to this form of business model innovation as new activity system “governance.”
Six Questions to Ask Before Launching a New Model
Our research shows that in a highly interconnected world, especially one in which financial resources are scarce, entrepreneurs and managers must look beyond the product and process and focus on ways to innovate their business model. A fresh business model can create and exploit opportunities for new revenue and profit streams in ways that counteract an aging model that has tied a company into a cycle of declining revenues and pressures on profit margins. We suggest that managers ask themselves the following six key questions as they consider business model innovation:
1. What perceived needs can be satisfied through the new model design?
2. What novel activities are needed to satisfy these perceived needs? (business model content innovation)
3. How could the required activities be linked to each other in novel ways? (business model structure innovation)
4. Who should perform each of the activities that are part of the business model? Should it be the company? A partner? The customer? What novel governance arrangements could enable this structure? (business model governance innovation)
5. How is value created through the novel business model for each of the participants?
6. What revenue model fits with the company’s business model to appropriate part of the total value it helps create?
Addressing the six questions outlined above can help managers see their companies’ identities more clearly in the context of the networks and ecosystems in which their organizations operate. Without a business model perspective, a company is a mere participant in a dizzying array of networks and passive entanglements. Adopting the business model perspective can help executives purposefully structure the activity systems of their companies; the purposeful design and structuring of business models is a key task for general managers and entrepreneurs and can be an important source of innovation, helping the company look beyond its traditional sets of partners, competitors and customers. Most importantly, perhaps, this approach encourages systemic and holistic thinking when considering innovation, instead of isolated, individual choices.
Adapted from Creating Value Through Business Model Innovation, MIT Sloan Management Review.